SG Fleet’s float raises questions about FBT

Ahead of fleet management and salary packaging company
SG Fleet
floating on the local exchange early next month, the big question for potential investors is how to value the risk of future changes to Australia’s fringe benefits tax regime.

CHAMP Ventures Private Equity will offload its entire 41.1 per cent interest, having secured $189 million through the off-market bookbuild that closed on Thursday. The offer, brokered by Goldman Sachs and Morgan Stanley, was for 101.94 million new shares at $1.85 each.

Normal trading on the ASX is due to start on March 11.

The initial public offering was ­originally priced to raise up to $244 million, but last week the price was lowered to close the deal, meaning $189 million will be raised.

SG Fleet’s final offer price of $1.85 is calculated at 11.5 times ­forecast net profit after tax for financial year 2015.

“The offer was repriced due to ­uncertainty in the market about Toyota exiting Australia and the share price performance of one of our ­competitors," SG Fleet’s chief executive
Robbie Bau
said.

Shares in salary packaging company
McMillan Shakespeare
dipped last week on the news that Toyota plans to cease manufacturing cars in Australia within three years.

In July, McMillan’s shares ­plummeted from $18 to $8.13 after the former Labor government revealed plans to tighten FBT concessions that make ­novated leases and salary packaging on cars more attractive to employers and their employees.

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The election in September of the Coalition government, which has pledged not to change the FBT rules, provides relative certainty until the next Federal election in a few years’ time. But longer term, the regulatory risk to the business model of SG Fleet Group and their competitors persists.

Mr Blau said the company would be less vulnerable to any possible future reduction in fringe benefits tax concessions than some competitors, because its main business is fleet management, not salary packaging.

About 37 per cent of SG Fleet Group’s earnings are derived from novated leasing, a significant portion of earnings that could be negatively affected by future changes in government policy.

The remaining 63 per cent of earnings is derived from fleet management, which does not face significant regulatory risk. Fund managers and analysts are divided on whether the discounted IPO now reflects fair value.

At listing, the company will have a market capitalisation of $449 million, a $5.2 million discount on its enterprise valuation of $454.2 million.

After the float, new shareholders will control roughly 42 per cent of the company. Management will own 7 per cent, with voluntary escrow arrangements on their shares.

South African-listed transport and logistics company Super Group will remain the majority shareholder with a 51 per cent stake, on which no escrow conditions apply.

Super Group has stated it plans to remain the majority shareholder in the long term.

A strength of the company in attracting investors for the initial public offer was its 25 year history. Founded in Australia in 1988 the group now also has operations in New Zealand and the United Kingdom.

The company has low gearing. Pro forma net debt is 0.1 times earnings before interest, tax, depreciation and amortisation for financial year 2015.

Pro forma consolidated revenue grew 13 per cent per annum between 2011 and 2013, while pro forma earnings before interest and tax rose 45 per cent over the same period.

Being established as a profitable business means the company is in a position to provide guidance on future dividends.

Directors are targeting distributions of between 60 per cent and 70 per cent of net profit after tax in the form of fully franked dividends.

Investors are told to expect an annual dividend payout ratio between 5.2 per cent and 6.1 per cent.

The board intends to distribute a final dividend of 4¢ per share in October 2014 for the period ending June 2014.

How SG Fleet Group’s shares perform on listing will be closely watched by the market. Not only because it will be the first big float of 2014. SmartSalary, another salary packaging company is also planning its own $200 million IPO in the coming months.